Irrational Outcomes in California
The states new budget may be on time, but it relies yet again on phony revenue assumptions.
19 June 2012
Say this for the $92 billion budget that Californias legislature sent to Governor Jerry Brown on Friday: at least it wasnt late. The deadline was met, state senate leader Darrell Steinberg announced with little fanfare or much evident pride. The Sacramento Democrat added: We passed a budget today that is balanced—which the states constitution now requires lawmakers to do by June 15, or they lose their salaries and daily expense allowances. But the legislatures work isnt done, and Brown has until July 1 to sign the spending plan, veto it in part, or void it entirely. And the fact is, in the Golden State, its much easier for the legislature to claim the budget is balanced than to balance an actual budget.
This is the second year lawmakers had to act before a hard deadline. Last year, the legislature assembled a budget so flimsy that even Brown couldnt concoct a plausible excuse to sign it. I dont want to see more billions of borrowing, legal maneuvers that are questionable and a budget that will not stand the test of time, the governor said in his veto message, to Democrats dismay. Less than two weeks later, however, Brown signed a budget with all of those defects intact, though they were somewhat more disguised. In the interim, state controller John Chiang withheld legislators pay and per-diem payments, as a 2010 voter-approved amendment clearly mandated. Legislators sued, arguing that Chiang misinterpreted the deadline requirement. Incredibly, a Sacramento superior court judge sided with the legislators. As long as a majority passes a budget thats balanced on its face by June 15, the judge ruled, lawmakers have met their constitutional obligation.
And so the spending plan currently sitting on Browns desk is balanced only insofar as it relies once more on phony revenue assumptions to close a nearly $16 billion deficit (up from $9 billion at the beginning of the year). The most outlandish assumption is that voters will pass Browns November ballot initiative to raise the state sales tax by a quarter of a cent to 7.5 percent and increase income taxes on upper earners by as much as 29 percent. Brown and his Democratic allies estimate the new taxes will reap an additional $8.5 billion in revenue for the coming fiscal year. The nonpartisan Legislative Analyst Office disagrees, estimating the initiative will generate somewhere between $4.8 billion and $6.9 billion in the first year, with diminishing returns through 2017. The new budget continually pits hope against experience: it assumes that the state will collect $400 million from the national mortgage-lawsuit settlement and raise $1 billion through the auction of carbon credits under Californias ill-conceived cap-and-trade scheme, of which $500 million would go to the states general fund. The budget also looks forward to raking in as much as $2 billion in capital gains taxes over the next two years from Facebooks initial public offering—an estimate left unchanged even after the IPO fizzled and the stock lost a quarter of its initial value.
In the coming days, lawmakers will send a dozen or more trailer bills to Brown for his signature or veto. These are critical legislative add-ons that often receive the least scrutiny even though they contain the most controversial provisions. In the wake of last years veto drama, for example, Brown quietly signed Assembly Bill 114, which barred school districts from laying off teachers to mitigate midyear budget shortfalls. The California Teachers Associations lobbyists helped ram through AB 114 with no public hearings, and Brown signed the bill less than a day after it passed. School districts didnt realize the laws importance until weeks later.
Midyear budget cuts will be a factor if Browns tax measure fails. As of now, the governors fallback would involve $6 billion in additional cuts, mostly to K-12 education. Under Proposition 98, a complicated school-funding mechanism voters approved in 1988, the state constitution requires at least 40 percent of the general fund be dedicated to schools—and at $38.5 billion annually, the elementary and secondary education budget is where the money is. Of course, Brown is outlining these contingency cuts now—putting a gun to peoples heads, as he said in a slightly different context last year—to spur voters to back the tax proposal and thus avert education cuts.
But the story is more complicated than that. This years budget, in fact, would spend about 5 percent more overall, including 13 percent more for education—or roughly $4.5 billion more. Brown and his Capitol supporters say most of that money technically isnt new—about $2.3 billion is supposedly there to compensate for past borrowing from Prop. 98s mandated minimum-spending requirement. Announcing that it had serious concerns last month with Browns calculations, the LAO says the governor overestimated the amount the state owes the public schools by perhaps as much as $2 billion and concluded that his education budget assumptions lead to irrational outcomes.
Californias budget process, bound in part by voter-imposed strictures on what legislators can and cannot do, all but guarantees irrational outcomes every year. Democrats dominate both houses of the legislature, and they may be closer than ever to having enough votes to impose tax increases, regardless of what voters think. Meantime, Republicans essentially boycotted this years budget, rightly blaming Democrats for forcing votes on complex legislation almost as soon as the bills appeared from the printer. If fiscal conservatives have any cause for optimism in California, it may be the knowledge that voters have shown little appetite in recent years for raising taxes on themselves. (A cigarette-tax increase on the June 5 ballot appears headed, albeit narrowly, for defeat.) A rebuke of Browns tax proposal in November wouldnt end the cycle of irrational budgeting in the Golden State, but it might force Democrats to reexamine their premises. Brown has often warned that the day of reckoning is upon us. For Californias sake, lets hope hes right.
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